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Is a Nanny Tax Deductible?

Posted by Kathy Webb on Mar 12, 2013 12:55:00 PM

There is good news for household employers who pay their nanny or senior caregiver "on the books."  These employers are often eligible for tax savings on their personal income tax returns.  And these tax savings often go a long way towards offsetting the household employer taxes they paid!

nanny tax breaksThere are two popular tax savings strategies available to families employing a nanny or other caregiver.  Families are entitled to these tax breaks as long as long as both spouses are working or a full-time student, and the caregiver is employed to take care of a dependent so the parents can work.  Your elderly loved one may also be a dependent for tax purposes, so long as certain criteria are met. The families must also report and pay taxes on the caregiver’s wages to be eligible for either tax break.

Dependent Care Account, also commonly called Flexible Spending Account

Many businesses offer a Dependent Care Account as part of their flexible benefits plan.  A family can contribute up to $5,000 of pre-tax earnings to the account to be used for dependent care expenses that are necessary to enable the parents to work.  These earnings are sheltered from Federal income tax, FICA taxes and most state income taxes.

A family with an adjusted gross income of $80,000 per year could save $1,250 in Federal taxes and perhaps an additional $250-$700 in state taxes.  Families in the highest tax bracket could realize a savings of almost $2,000 in Federal taxes alone.  To put this in perspective, families pay about 10% of a caregiver’s wages in various employment taxes, so their total employer payroll taxes for a caregiver earning $20,000/ year is about $2,000.

Child and Dependent Care Tax Credit

If your employers do not offer a Dependent Care Account, you can claim a Tax Credit for Child or Dependent on your personal tax return.  The Child Care Credit allows you to apply the first $3,000 of expenses ($6,000 if you have 2 or more children) you paid for qualified child/dependent care towards a tax credit.  For families earning over $43,000/ year in 2012, the credit is 20% of the expenses.  So most employers would qualify for a $600-$1,200 tax credit.

A tax credit is not a deduction; a tax credit directly reduces the amount of tax you owe the IRS at the end of the year.

You can find more details about tax breaks available to household employers  @ 4nannytaxes.com.  Click the Resources tab and go to Tutorials. 

In addition, IRS Publication 929 contains more information about Dependent Care Accounts.  IRS Publication 503 contains information on the Child and Dependent Care Tax Credit. IRS Publication 501: Exemptions, Standard Deductions and Filing Information will help you understand if an elderly loved one qualifies as your dependent.

Do you pay your household employee's health insurance premium? Speak to your tax advisor about the Small Business Health Insurance Tax Credit - you may qualify!

Topics: nanny payroll tax, nanny tax, nanny taxes, nanny health insurance

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